Alternative Investment Questions CFA

Question 1 of 10

Medal-premium 1

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"What are the fees earned by AWJ if the incentive and management fees are calculated independently? What is an investor’s effective return given this fee Structure?"

Select one or more of the following:

  • AWJ fees $130 million × 2% = $2.6 million management fee
    ($130 – $100) million × 20% = $6 million incentive fee
    Total fees to AWJ Capital = $8.6 million
    Investor return: ($130 – $100 – $8.6)/$100 = 21.40%"

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Question 2 of 10

Medal-premium 1

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"What are the fees earned by AWJ assuming that the incentive fee is calculated based on return net of the management fee? What is an investor’s net return given this fee structure?"

Select one or more of the following:

  • "$130 million × 2% = $2.6 million management fee
    ($130 – $100 – $2.6) million × 20% = $5.48 million incentive fee
    Total fees to AWJ Capital = $8.08 million
    Investor return: ($130 – $100 – $8.08)/$100 = 21.92%"

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Question 3 of 10

Medal-premium 1

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"If the fee structure specifies a hurdle rate of 5 percent and the incentive fee is based on returns in excess of the hurdle rate, what are the fees earned by AWJ assuming the performance fee is calculated net of the management fee? What is an investor’s net return given this fee structure?
In the second year, the fund value declines to $110 million."

Select one or more of the following:

  • "$130 million × 2% = $2.6 million management fee
    ($130 – $100 – $5 – $2.6) million × 20% = $4.48 million incentive fee
    Total fees to AWJ Capital = $7.08 million
    Investor return: ($130 – $100 – $7.08)/$100 = 22.92%"

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Question 4 of 10

Medal-premium 1

AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation.

"The fee structure is as specified for question 1 but also includes the use of a high water mark. What are the fees earned by AWJ in the second year? What is an investor’s net return for the second year given this fee structure?
In the third year, the fund value increases to $128 million."

Select one or more of the following:

  • "$110 million × 2% = $2.2 million management fee
    No incentive fee because the fund has declined in value.
    Total fees to AWJ Capital = $2.2 million
    Investor return: ($110 – $2.2 – $121.4)/$121.4 = −11.20%.
    The beginning capital position in the second year for the investors is ($130 − $8.6) million = $121.4 million.
    The ending capital position at the end of the second year is ($110 − $2.2) million= $107.8 million."

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Question 5 of 10

Medal-premium 1

"AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation."

The fee structure is as specified in questions 1 and 4. What are the fees earned by AWJ in the third year? What is an investor’s net return for the third year given this fee structure?"

Select one or more of the following:

  • "$128 million × 2% = $2.56 million management fee
    ($128 – $121.4) million× 20% = $1.32 million incentive fee. The $121.4 mil- lion represents the high-water mark established at the end of Year 1.
    Total fees to AWJ Capital = $3.88 million
    Investor return: ($128 – $3.88 – $107.8)/$107.8 = 15.14%. The ending capital position at the end of Year 3 is $124.12 million. This is the new high-water mark."

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Question 6 of 10

Medal-premium 1

"AWJ Capital is a hedge fund with $100 million of initial investment capital. They charge a 2 percent management fee based on assets under management at year- end and a 20 percent incentive fee. In its first year, AWJ Capital has a 30 percent return. Assume management fees are calculated using end-of-period valuation."

What are the arithmetic and geometric mean annual returns over the three-year period based on the fee structure specified in questions 1, 4, and 5? What is the capital gain to the investor over the three-year period? What are the total fees paid to AWJ over the three-year period?"

Select one or more of the following:

  • "Arithmetic mean annual return = (21.4% – 11.20% + 15.14%)/3 = 8.45% Geometric mean annual return = [cube root of (124.12/100)] – 1 = 7.47% Capital gain to the investor = ($124.12 – $100) million = $24.12 million Total fees = ($8.6 + $2.2 + $3.88) million = $14.68 million"

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Question 7 of 10

Medal-premium 1

"An investor is contemplating investing €100 million in either the ABC Hedge Fund (ABC HF) or the XYZ Fund of Funds (XYZ FOF). XYZ FOF has a “1 and 10” fee structure and invests 10 percent of its assets under management in ABC HF. ABC HF has a standard “2 and 20” fee structure with no hurdle rate. Management fees are calculated on an annual basis on assets under management at the beginning of the year. Management fees and incentive fees are calculated independently. ABC HF has a 20 percent return for the year before management and incentive fees."

"1. Calculate the return to the investor of investing directly in ABC HF."

Select one or more of the following:

  • "ABC HF has a profit before fees on a €100 million investment of €20 million (= 100 million × 20%). The management fee is €2 million (= €100 million × 2%) and the incentive fee is €4 million (= 20 million × 20%). The return to the investor is 14 percent [= (20 – 2 – 4)/100]."

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Question 8 of 10

Medal-premium 1

"An investor is contemplating investing €100 million in either the ABC Hedge Fund (ABC HF) or the XYZ Fund of Funds (XYZ FOF). XYZ FOF has a “1 and 10” fee structure and invests 10 percent of its assets under management in ABC HF. ABC HF has a standard “2 and 20” fee structure with no hurdle rate. Management fees are calculated on an annual basis on assets under management at the beginning of the year. Management fees and incentive fees are calculated independently. ABC HF has a 20 percent return for the year before management and incentive fees."

"Calculate the return to the investor of investing in XYZ FOF. Assume that the other investments in the XYZ FOF portfolio generate the same return before management fees as ABC HF and have the same fee structure as ABC HF."

Select one or more of the following:

  • "XYZ FOF earns a 14 percent return or €14 million profit after fees on €100 mil- lion invested with hedge funds. XYZ FOF charges the investor a management fee of €1 million (= €100 million × 1%) and an incentive fee of €1.4 million (= €14 million × 10%). The return to the investor is 11.6 percent [= (14 – 1 – 1.4)/100]"

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Question 9 of 10

Medal-premium 1

"An investor is contemplating investing €100 million in either the ABC Hedge Fund (ABC HF) or the XYZ Fund of Funds (XYZ FOF). XYZ FOF has a “1 and 10” fee structure and invests 10 percent of its assets under management in ABC HF. ABC HF has a standard “2 and 20” fee structure with no hurdle rate. Management fees are calculated on an annual basis on assets under management at the beginning of the year. Management fees and incentive fees are calculated independently. ABC HF has a 20 percent return for the year before management and incentive fees."

"3. Why would the investor choose to invest in an FOF instead of an HF given the effect of the “double fee” as demonstrated in the answers to questions 1 and 2"

Select one or more of the following:

  • "This scenario assumed that returns were the same for all underlying hedge funds. In practice, this result will not likely be the case, and XYZ FOF may provide due diligence expertise and potentially valuable diversification."

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Question 10 of 10

Medal-premium 1

A hedge fund with a fundamental value hedge fund stratey interests in domestic publicly traded shares that are considered to be highly liquid. When computing the NAV, the fund it is more likely to use which of the following methods to value the underlying positions?

Select one of the following:

  • Esttimates of valye using in house model

  • Average of the bid ask adjusted for liquidity

  • Bid Price for Long positions and ask prices for short positions.

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Alternative Investment Questions CFA

Mace
Quiz by , created almost 3 years ago

Quiz on Alternative Investment Questions CFA, created by Mace on 26/02/2014.

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Created by Mace almost 3 years ago
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